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Funding Circle rate change comments
The change this morning to minimum lending rates has generated a lot of comments, with no less than 177 comments on the thread entitled introducing new minimum bid rates for new loans, most of them against this. So why would lenders - who would potentially benefit from this - be against this change ?
Firstly, current lenders have found some of their recent loans are at rates below the minimum and will now find it a lot harder to sell them if they wish to. Secondly some lenders were concerned by the lack of communication, although Funding Circle did state that they did consult with some lenders, but did not want to make this information available to a wider group, as it would have an impact on the market.
Have Funding Circle done the right thing ? In our opinion - yes - but they could have had a gradual increase from 4% to 10.5%. Why has Funding Circle done this ? Over the last year Funding Circle has become a bit of a victim of its own success, and lending rates have tumbled recently, with some lenders offering money at rates that perhaps do not take into account the impact of bad debts.
This will have a short term impact as some lenders voice concerns, but this would prevent a longer term problem if those same lenders found themselves sitting on bad debts that consumed all of their interest and ate into their investments.
This entry was posted on June 24th, 2013 at 08:57:00 pm by easteregg and is filed under News, Background, Lending.
2 comments
Agree with your comments, re. the longer term picture. However, shorter term, there appears to be (judging by the FC Forum Comments) a not insignificant number of lenders now locked into loans they intended to sell-on, and are much less likely to be able to do so. They are, understandably, not happy. I'm an FC lender who is less unhappy, but I still don't appreciate such a radical change being rushed into place without any prior warning. It has profoundly altered the bidding process on C-based loans. Indeed, because loans are now being filled much faster at these minimum/floor rates, there is now almost no point in asking questions of the borrower because the auction will have been filled at the minimum rate by the time you've finished typing.In my opinion, rushing these minimum limits into place is a massive balls-up on the part of FC, and they are going to lose some of their lender base as a result of it. People do not appreciate having their money locked into an asset they believed to be liquid. It's one thing when normal market forces cause a loss of liquidity. It's quite another when it is done by a centrally planned change.
The complaints about "liquidity" seem to be misplaced. Funding Circle was never meant to be a market for speculators flipping loans. The secondary market was always intended for people needing to cash in their investments, for whatever reason, hence the limit of 3% discount/premium on sales. If this scares the speculators away then so much the better. The secondary market is looking a lot better for buyers now. I have been buying more than I have done for a long time. Of course, I am buying at rates that I am happy to hold for the duration of the loan, which is what I intend to do.Some of the other complaints just seem to boil down to "I recently lent/bought a load of loans at stupid low interest rates and now I look stupid." Yeah, well. Who's fault is that?
Where there is some room for legitimate complaint is how this drastic change was swung on us without notice, although at least it was a mostly beneficial change (unlike Zopa's recent drastic changes which have killed Zopa for me and left me withdrawing my money as interest comes in because you simply can't get money out at any rate at all unless you sign up to "Safeguard").
I also worry a little that loans are now funded so quickly that there is no time to check out the borrowers or to ask them questions.
I also worry that the minimum rates are a bit too high for the B and C markets. Admittedly, they are only a little bit higher than I have my Autolend set to but then I was always happy to lend manually at lower rates than my Autolend rates on decent loans with good asset security on them. In fact, in the run up to this change I had pretty much been focussing exclusively on secured loans as the others did not seem to offer any sort of sensible risk adjusted return.
So, in my view, there is room for a few tweaks to the new system but I still see it as mostly positive.
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